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First American Financial Boosts Income, Sees Housing Strength in 2016

The title company has seen its operations return to normal after implementing new regulations.

The housing market drives plenty of business beyond simply constructing homes, and title insurance provider First American Financial (NYSE:FAF) has been a big winner in the rebound of housing in recent years. Yet recently, its stock and that of competitor Fidelity National Financial (NYSE:FNF) have struggled on fears that the housing market might finally run out of steam. Coming into Thursday's fourth-quarter financial report, First American Financial shareholders believed that the company might see a slight downtick in earnings, but the title insurer defied those concerns with profit growth and a positive outlook on housing for 2016. Let's take a closer look at the latest results from First American Financial and what they say about the industry's future.

First American bounces backFirst American Financial's fourth-quarter results were substantially stronger than most had expected. Revenue jumped 8% to $1.36 billion, almost doubling the growth rate that investors had thought First American would post. Even better was the fact that net income inched upward by 1%, and that produced earnings of $0.74 per share. That was $0.04 above the consensus forecast among those following the stock.

Looking at the numbers, perhaps the most impressive part of First American Financial's success is that it came despite some headwinds on the investment side. During the quarter, the company suffered realized investment losses of $6.3 million, which pulled down net earnings by $0.04 per share. That compared unfavorably to investment gains in the year-ago quarter in a similar amount.

First American's major segments both moved generally in the same direction during the quarter. Title insurance and services saw an overall uptick in sales of 8%, and average revenue per order rose despite roughly flat order volume compared to the year-ago quarter. Commercial transactions grew at a more rapid rate than the traditional residential business, reflecting strength in that side of the real estate industry. Lower demand for information services continued to weigh on First American's overall results, but revenue for that segment was down just 2%, and the company cited less foreclosure activity as a reason for the fall.

Meanwhile, specialty insurance revenue rose 5%, although pretax income from the segment took a big hit. Loss experience was more typical than it had been in the year-earlier period, and First American Financial pointed to hailstorms in New Mexico as a substantial cause for higher losses.

CEO Dennis Gilmore celebrated the results. "We successfully implemented the significant changes required as part of the new mortgage disclosure rule that went into effect in October," Gilmore said, and "after experiencing some initial delays, our direct residential business returned to its typical closing timeframes by the end of the quarter." The CEO also pointed to the record year that First American Financial's commercial business had and celebrated high margins and returns on equity.

Can First American Financial ride housing higher?First American Financial also sees good times continuing. Gilmore noted that not only is the purchase market looking strong, but an unexpected drop in mortgage rates has also reenergized the refinancing market as well. The CEO connected that optimism to First American's January decision to boost its quarterly dividend by 4% to $0.26 per share.

Those results were generally in line with what Fidelity National Financial posted earlier in the week. Fidelity said that its title insurance results were solid, and although margins compressed by a percentage point during the quarter, adjusted pretax earnings inched higher on substantial revenue increases. Fidelity National Financial also saw similar experience to First American in its mix of residential and commercial title business, and an uptick of 11% in commercial-related revenue reflected the same trends in Fidelity National's quarter that First American saw.

Nevertheless, First American Financial shareholders didn't respond positively to the report, sending the stock down 2% at the open following the announcement on a tough day for stocks generally. Concerns about the economy will move First American shares, but the real question will be whether housing can hold up even if the stock market remains volatile. If so, then First American Financial could see a big rebound from its recent losses.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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